Bank of Canada Pushes Up Interest Rates
On the 17th of January the Bank of Canada raised interest rates by 0.25 percentage points, which translates into a 0.15% increase in the 5-year conventional mortgage, bringing it up to 5.14%. While the 0.15% increase might seem insignificant, it does have a substantial effect on potential homebuyers, reports Better Dwelling.
Borrowing Power Drops by 1.6%
The seemingly insignificant increase will reduce borrowing power, also known as “affordability”, by 1.68%. In raw numbers this means that at a rate of 4.99% a household with a yearly income of $100,000 would have been able to borrow approximately $534,594 for a mortgage. At an interest rate of 5.14% the same household would only get a $525,577 loan, which translates into a $9,017 decline.
Buyers Will Also Pay More Interest
This will also lead to an increase in the amount of interest paid. For instance, for a $600,300 house (the composite aggregate benchmark price published by the Canadian Real Estate Association in December 2017), on a conventional mortgage which includes a 20% down payment, the typical borrower would get $480,240. At a 4.99% interest rate, the interest paid over 30 years would amount to $446,795. At 5.15% the interest paid increases to $462,700, which means the buyer would have to shell out an extra $15,905 for the same property.
The market is anticipating two more rate hikes this year. On the one hand, buyers’ purchasing power is expected to reduce even more. On the other hand, this could also inspire more home buyers to try and close a fixed rate as soon as possible. In any case, with low interest rates soon to be a thing of the past, and more and more people’s buying power declining, the trajectory of the Canadian real estate market this year has become a hot topic.
What do you think the outcome will be?
Original article published by betterdwelling.com